Blogs » Politcs Plus » Depression 2.0....Averted


I just finished reading an article by Robert J. Samuelson, (Newsweek contributor) explaining how close we got to the Great Depression 2.0. According to Christina Romer, the head of President Obama's Council of economic advisers, “We got pretty dang close.” Christina Romer is a scholar of the Great Depression. I don't know why she is not Treasury Secretary. She is candid and not afraid to say "I don't know.”

Christina Romer said that a depression is more than an economic downturn. What distinguishes a depression from harsh recession is the paralyzing fear-fear of the unknown so great that it causes businesses, consumers and investors to retreat and panic. According to Alan Greenspan, companies overreacted and laid-off more people than they needed to. They are still in that mode. The hoarding of cash and curtailing spending overrides the self correcting mechanism such as lower interest rates, inventory resupply, and cheap prices.

Allowing Lehman Brothers to fail made the crisis worse by turning anxieties into abnormal fears and panic. That September 2008 decisions lead to the freezing of the credit markets and collapsing stock market prices. Consumer confidence index was at 61.4% when Lehman Brothers went into bankruptcy (September 2008) by February of 2009, it was at 25.3%. At this point consumers stopped buying big-ticket items and businesses shut down their investment projects.

The free market usually does a self -correct but when panic sets in and disarms stabilizing tendencies, only government can protect the economy as a whole, because most individuals and companies are involved in self-defeating behavior of self protection. The government failure to perform this role in the 1930s transformed a recession into the Great Depression. Economists and scholars will continue to argue over what policies kept us going over the cliff. Was the Federal Reserve's support for a failing credit system, the TARP guarantees of bank debt, Obama's “stimulus" plan and bank stress plan? Christina Romer believes that all those measures had a psychological purpose: to assure people that the free falling would stop and thereby curbing the fear that would perpetrate a free fall. It seemed to have worked because last month's consumer confidence index rebounded to 53.1% and housing prices have increased for the last three months. She said "improved confidence is not optimism. It is the absence of terror."

Unemployment (9.8%) is terrible and our recovery strength is unclear but despite bottoming out in 1933, the Depression didn't end until World War II. I think it's fair to say that some government policies aided recovery and some impeded it. The jury is still in session.

For now, I trust Obama's economic team of Larry Summers, Christina Romer, Ben Bernanke, Timothy Geither,Peter Orzag,Austan Goolsbee, and former Fed Chairman Paul Volker will do their very best to put this country back on a strong economic path.

Ron Paul was Jon Stewart's guest last week, where he was criticizing the administration's economic policies and offering his solutions as if they were a truth certain. Jon Stewart stunned Dr. Paul when he asked him if any country had tried any of his ideas. Dr. Paul did not have a reply. All untested ideas are great.

I often wonder how long the soup lines would have been last November; if we didn't have Social Security,Medicaid,Medicare and unemployment benefits in place.Where would unemployment be,if we would have let the banks,AIG,Wall Street, and the auto industry fail?

*October 12,2009 edition of Newsweek...The Great Escape:How we narrowly avoided a depression by Robert J. Samuelson